Recent Updates on Non-Declared Offshore Banking

A few recent updates regarding the crackdown on non-compliant offshore accounts.

On April 15, 2010, the same day income tax returns were due, seven new defendants were charged with criminal tax fraud for failing to declare offshore accounts. The charges included failing to declared monies at UBS and other banks, and using foreign corporations and foundations in Panama, British Virgin Islands, Liechtenstein and Hong Kong to obscure the true beneficial ownership over the accounts. This type of offshore structure has been a particular target of prosecutors, with Hong Kong and Panama entities appearing frequently in the criminal charges. Of course, prosecutors are not limiting themselves to this type of structure, nor to UBS accounts, nor to accounts only in Switzerland. With 15,000 taxpayers coming forward under the Voluntary Disclosure Program, the IRS is now cataloging and linking foreign banks and service providers, and it is safe to say that more prosecutions will ensue, involving other banks and other foreign countries. If you still have a foreign account that is not tax-compliant, it may not be too late to make it compliant and avoid criminal charges.
Second, it appears that the Swiss Parliament will pass a law that will solidify the settlement between the U.S. Justice Department and UBS and thereby allow UBS to hand over to the IRS between 4,500 and 10,000 names of Americans with undeclared UBS accounts. In January, the Swiss Federal Administrative Court ruled that the failure to file an IRS form W-9 regarding a UBS account did not constitute tax fraud, and thus UBS could not disclose account information to the IRS. The ruling was thus at odds with UBS’ obligations under the settlement agreement. However, it now appears that in June, the Swiss Parliament will legislate around that court ruling. (This occurs frequently in our own system of government and its “checks and balances”. If a court rules one way, the legislature can pass a law to reverse the court’s ruling.) In June, the Swiss Parliament will likely pass legislation that will elevate the UBS agreement to the level of international treaty. Tax fraud and tax evasion will become indistinguishable under Swiss law for purposes of disclosure under the settlement agreement and the treaty. The effect will be to neutralize the court’s contrary January ruling, and mandate UBS’ compliance with the settlement agreement.

In addition, on March 31, 2010, Switzerland and the US signed an amended protocol to the settlement agreement. As UBS has advised us, “Under the new protocol, the Treaty Process will continue even before the June [Parliament] sessions.”

Americans with Swiss accounts who have not yet come forward are well-advised to come forward now, before UBS names names, and before other banks receive summonses from the US.

Liechtenstein is also contemplating legislation, which would prevent Liechtenstein from assisting a tax inquiry from a foreign government, if the basis of the investigation is derived from stolen banking data. Earlier this year, the German government paid millions of Euro for banking data stolen by an employee of a Swiss bank. In 2008, a renegade employee of LGT Bank in Liechtenstein stole data about client accounts and sold the data to the German intelligence service in return for more than four million Euros. With that data, the German government prosecuted Germans for tax fraud. The German government also shared the data with other governments around the world. Liechtenstein, which has signed various Tax Information Exchange (TIE) Agreements, including with the US, will continue to provide banking information in response to inquiries by foreign governments, except when the basis of the inquiry is from stolen banking data.

These recent events all point to the continuing erosion of offshore banking secrecy. It is completely legal to have funds offshore, and there are many good reasons for having a foreign account (e.g., international business transactions, global investment and diversification, asset protection), as long as the foreign accounts are part of a tax compliant strategy or are disclosed and taxes are paid on foreign the income. If the offshore accounts are tax-compliant, then the erosion of banking secrecy and revelations by foreign governments to the IRS are not threats. Strategies exist for the minimization of tax on foreign income in a tax compliant manner. The lesson: if you have assets in foreign banks or foreign brokerages, make sure they are tax compliant. As the window of banking secrecy closes further, taxpayers with tax-compliant accounts need not worry. Non-compliant account owners, however, are again advised to see us, before the IRS sees you.